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A Matter Of Money

At the White Collar Crime Prof Blog, Ellen Podgor — who’s now the solo blog editor since Peter Henning placed himself on well-deserved blog editor emeritus status — discusses some of the obligations imposed by the Department of Justice on AB Volvo and its two subsidiaries in their deferred prosecution agreement here. Those companies recently resolved Foreign Corrupt Practices Act violations that arose under the U.N. Oil for Food Program. (See our post here.)

She mentions a few aspects among many in AB Volvo’s deferred prosecution agreement — the requirement for the DOJ’s pre-approval of any statements to the media by the companies about their agreement, and the right of the DOJ to take into account refusals by the companies to waive attorney-client privilege in determining their level of cooperation. And, she says, the DOJ alone has the right to decide if the agreement has been breached, generally without regard to the companies’ statute of limitation rights. Prof Podgor posts the AB Volvo deferred prosecution agreement here.

We’re fascinated, as usual, by the successor liability provision in the agreement. This feature has been common for a while — it appeared in ABB’s agreement with the DOJ, for example — but we’re still trying to work out the implications. The substance of it is that in any agreement by the companies to sell, merge or transfer all or substantially all of their business operations, whether structured as a stock or asset sale, merger or other transfer, the operative document must include provisions “binding the purchaser or any successor in interest thereto to the obligations described” in the deferred prosecution agreement.

The provision is intended, among other things, to prevent the companies from slipping out of their deferred prosecution agreements through a corporate transaction or restructuring of some kind. That makes good sense. And to be effective, the provision really does need to reach not only immediate but also subsequent buyers — who could actually be the companies themselves or related entities.

The interesting part, however, is when bona fide third-party buyers show up. That has happened with other businesses subject to successor liability provisions. It doesn’t matter, for example, if the buyer is non-American and not otherwise subject to the jurisdiction of the FCPA. The compliance obligations still travel with the business being sold, no matter where it comes to rest.

That helps level the playing field for American companies. Non-U.S. companies can’t exploit businesses that may be distressed because of FCPA problems. They can’t buy the assets, domicile them offshore, and free them from their compliance obligations. It protects American businesses from unfair competition. Also, successor liability provisions help disseminate and promote best practices around the globe by tying compliance obligations to the business assets, wherever they end up, and not to the original corporate entities that are parties to the deferred prosecution agreements. The process has already spread compliance best practices to European and other companies that have purchased businesses subject to the successor liability requirements.

But there’s a price attached to successor liability provisions — an unidentified penalty of sorts. Business assets subject to FCPA compliance obligations, including waivers of rights to media access, for example, and attorney-client privilege and statute of limitations, are likely to have a different valuation than similar, unencumbered assets.

How much impact successor liability provisions have on a business’ valuation is anyone’s guess. But the direct cost of compliance would be an element. Another aspect could be a diminution in the business’ value because of the threat of further sanctions by the DOJ without the benefit of any judicial review or protections offered by attorney-client privilege and statute of limitations. These must have a price tag — whatever it may be.

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  1. If a foreign company not otherwise subject to the FCPA were to acquire a company with a successor liability issue, could DOJ/SEC assert jurisdiction over the foreign company (1) if the purchase agreement contained an assumption of successor liability clause; and (2) if it didn’t?

  2. This is a GREAT comment. We’ve been thinking along the same lines. The short answer is that something more is needed for the DOJ to assert jurisdiction, other than a successor-liability clause. The “something more” might be a submission to jurisdiction provision or separate instrument, for example, from the acquiring foreign company. We’d like to think about this question a bit, then post a more complete answer. We’re traveling now and for the next ten days or so. If this can wait a bit, we’ll get on it when we’re back in our usual saddle.

  3. Just wondering whether you have given any thought to this very interesting issue.

  4. Although we think asserting liability as a third-party beneficiary through an assumption clause would face many legal obstacles, we still would be extremely careful about inserting such a clause in a private contract. The presence of the clause would make it difficult to argue later that jurisdiction is inappropriate or that the venue is inconvenient. Perhaps some readers have confronted the issue in litigation and can cite case law.

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